Message-ID: <15195143.1075845398035.JavaMail.evans@thyme> Date: Tue, 22 May 2001 05:41:21 -0700 (PDT) From: nikita.varma@enron.com To: nikita.varma@enron.com Subject: From the Enron India Newsdesk- May 22nd newsclips Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: quoted-printable X-From: Varma, Nikita X-To: Varma, Nikita X-cc: X-bcc: X-Folder: \Y'Barbo, Paul\Y'Barbo, Paul\Inbox X-Origin: YBARBO-P X-FileName: Y'Barbo, Paul.pst THE HINDU Tuesday, May 22, 2001, http://www.the-hindu.com/stories/06220007.htm Not too late to save Enron project , Prem Shankar Jha=20 ---------------------------------------------------------------------------= ------------------------------------------------------------- THE FINANCIAL EXPRESS Tuesday, May 22, 2001, http://www.financialexpress.com/fe20010522/news1.htm= l Centre calls meet on May 25 to resolve termination notice crisis, Sanjay J= og The above article also appeared in the following newspaper: THE INDIAN EXPRESS Tuesday, May 22, 2001,http://www.indian-express.com/ie20010522/bus2.html Centre calls meet on May 25 to resolve Enron's PTN issue, Sanjay Jog ---------------------------------------------------------------------------= ------------------------------------------------------------- THE ECONOMIC TIMES Tuesday, May 22, 2001,http://www.economictimes.com/today/22econ20.htm FIs seek Centre's intervention in DPC-MSEB row ---------------------------------------------------------------------------= ------------------------------------------------------------- THE ECONOMIC TIMES Tuesday, May 22, 2001,http://www.economictimes.com/today/22econ14.htm Maha seeks legal opinion on termination notice The above article also appeared in the following newspaper: THE TIMES OF INDIA Tuesday, May 22, 2001,http://www.timesofindia.com/today/22indi30.htm Maharashtra for legal opinion on termination notice=20 ---------------------------------------------------------------------------= ------------------------------------------------------------- THE FINANCIAL EXPRESS Tuesday, May 22, 2001,http://www.financialexpress.com/fe20010522/corp7.html Domestic DPC lenders seek Centre's advice on course of action=20 ---------------------------------------------------------------------------= ------------------------------------------------------------- THE HINDU BUSINESSLINE Tuesday, May 22, 2001,http://www.hindubusinessline.com/stories/14225601.htm Dabhol lenders draw blank with Finance Ministry , Shaji Vikraman , Balaji C= . Mouli=20 ---------------------------------------------------------------------------= ------------------------------------------------------------- THE TIMES OF INDIA Tuesday, May 22, 2001,http://www.timesofindia.com/today/22busi3.htm Re-negotiation best: Deshmukh; lenders' SOS to Centre=20 ---------------------------------------------------------------------------= ------------------------------------------------------------- THE HINDU BUSINESSLINE Tuesday, May 22, 2001,http://www.hindubusinessline.com/stories/14225602.htm Uncertainty over DPC presence at Godbole meet=20 ---------------------------------------------------------------------------= ------------------------------------------------------------- THE INDIAN EXPRESS Tuesday, May 22, 2001,http://www.indian-express.com/ie20010522/nat2.html Pawar urges Centre to buy Enron power ---------------------------------------------------------------------------= ------------------------------------------------------------- THE FINANCIAL EXPRESS Tuesday, May 22, 2001,http://www.financialexpress.com/fe20010522/news2.html MSEB not to pay capacity charges until receipt of Rs 401-crore rebate from = DPC=20 ---------------------------------------------------------------------------= ------------------------------------------------------------- THE ECONOMIC TIMES Tuesday, May 22, 2001,http://www.economictimes.com/today/22econ04.htm Finding new buyers key to DPC's future ---------------------------------------------------------------------------= ------------------------------------------------------------- THE FINANCIAL EXPRESS Tuesday, May 22, 2001,http://www.financialexpress.com/fe20010522/top4.html DPC to gain from ST waiver on naphtha, Sanjay Jog ---------------------------------------------------------------------------= ------------------------------------------------------------- THE ECONOMIC TIMES Tuesday, May 22, 2001,http://www.economictimes.com/today/22worl05.htm Enron sells stake in Dolphin to UAE Offsets The above article also appeared in the following newspaper: THE TIMES OF INDIA Tuesday, May 22, 2001,http://www.timesofindia.com/today/22inte2.htm Enron pulls out of major Gulf gas project=20 THE INDIAN EXPRESS Tuesday, May 22, 2001,http://www.indian-express.com/ie20010522/bus9.html Enron walks out of $3.5-bn UAE project ---------------------------------------------------------------------------= ------------------------------------------------------------- BUSINESS STANDARD Tuesday, May 22, 2001,http://www.business-standard.com/today/opinion3.asp?m= enu=3D8 FOCUS: THE ENRON CONTROVERSY, Dabhol: more heat than light A V Rajwade highlights some basic errors of omission and commission in the = Enron deal ---------------------------------------------------------------------------= ------------------------------------------------------------- THE TIMES OF INDIA Tuesday, May 22, 2001,http://www.timesofindia.com/today/22edit1.htm Business Unusual=20 ---------------------------------------------------------------------------= ------------------------------------------------------------- THE FINANCIAL EXPRESS Tuesday, May 22, 2001,http://www.financialexpress.com/fe20010522/fed3.html What happens when ignorance is bliss=20 ---------------------------------------------------------------------------= ------------------------------------------------------------- THE FINANCIAL EXPRESS Tuesday, May 22, 2001,http://www.financialexpress.com/fe20010522/fed1.html Learning by undoing=20 ---------------------------------------------------------------------------= ------------------------------------------------------------- THE INDIAN EXPRESS Tuesday, May 22, 2001,http://www.indian-express.com/ie20010522/ed1.html Enron unplugged ---------------------------------------------------------------------------= ------------------------------------------------------------- THE HINDU BUSINESSLINE Tuesday, May 22, 2001,http://www.hindubusinessline.com/stories/042221ed.htm Messier and messier=20 ---------------------------------------------------------------------------= ------------------------------------------------------------- BUSINESS STANDARD Tuesday, May 22, 2001,http://www.business-standard.com/today/edit1.asp?Menu= =3D9 Enr-off and Enr-out ---------------------------------------------------------------------------= ------------------------------------------------------------- BUSINESS STANDARD Tuesday, May 22, 2001,http://www.business-standard.com/today/edit2.asp?Menu= =3D9 The Godbole findings ---------------------------------------------------------------------------= ------------------------------------------------------------- Financial Times; May 21, 2001 Enron to quit India over unpaid bills POWER PROJECT COOLING-OFF PERIOD LOOK= S UNLIKELY TO SETTLE ACRIMONIOUS DISPUTE=20 BETWEEN US COMPANY AND BOMBAY CLI: KHOZEM MERCHANT ---------------------------------------------------------------------------= ------------------------------------------------------------- Financial Times, May 21, 2001 http://globalarchive.ft.com/globalarchive/articles.html?id=3D010521000893&q= uery=3Denron India's power struggles: Enron's plight could mark a turning point in Indi= a's attempts to attract foreign investment, David Gardner: ---------------------------------------------------------------------------= ------------------------------------------------------------- Financial Times; May 22, 2001 http://globalarchive.ft.com/globalarchive/articles.html?id=3D010522001152&q= uery=3Denron India unplugged=20 ---------------------------------------------------------------------------= ------------------------------------------------------------- Financial Times; May 22, 2001 http://globalarchive.ft.com/globalarchive/articles.html?id=3D010522000904&q= uery=3Denron Maharashtra pays the price for bad governance: Dispute with Enron has calle= d into question its status as India's preferred home for investment, KHOZEM MERCHANT ---------------------------------------------------------------------------= ------------------------------------------------------------- Financial Times; May 22, 2001 http://globalarchive.ft.com/globalarchive/articles.html?id=3D010522000903&q= uery=3Denron Ally threatens to desert BJP coalition, DAVID GARDNER ---------------------------------------------------------------------------= ------------------------------------------------------------- THE ECONOMIC TIMES Tuesday, May 22, 2001,http://www.economictimes.com/today/22edit09.htm LETTERS TO THE EDITOR - Power corrupts... ---------------------------------------------------------------------------= ------------------------------------------------------------- THE HINDU Tuesday, May 22, 2001, http://www.the-hindu.com/stories/06220007.htm Not too late to save Enron project , Prem Shankar Jha=20 After months of tortured haggling and increasing bad blood, the Indian stat= e and Enron, the giant American energy transnational, have reached a partin= g of ways. Having failed to get the Maharashtra State Electricity Board pay= for the electricity it is buying from its Dabhol Power Compay; having fail= ed to get the Maharashtra Government to honour its commitment to pay MSEB's= dues in case the latter is unable to do so, and having failed to make the = Central Government honour its counter-guarantee of MSEB's dues, Enron has = served a preliminary notice of termination. This gives the two parties six = months to settle the dispute. After that the Government will have to pay En= ron a large sum in termination costs. If the MSEB fights this and loses, th= e compensation and penalties could add up to Rs. 17,000 crores or one and a= half times the cost of the entire project. Predictably, the air is full of= brave statements by the Maharashtra Chief Minister, State officials, bank = managers and Central Power Ministry officials, that this would be good ridd= ance. The Central Government virtually said as much first by claiming that = this was simply a dispute between a single power company and a State govern= ment; then by refusing to honour its counter-guarantee of MSEB's dues, and = finally by not sending its representative to the first meeting of the reneg= otiating committee that the State Government thrust down Enron's throat on = April 23.=20 By doing all this it implicitly endorsed the view expressed by the Godbole = Committee that the power purchase agreement was faulty; that Enron had infl= ated its costs and that the pricing system adopted was extortionate. The tr= uth is that renegotiation alone cannot save the Enron project because it ca= nnot bring the cost of power sold by it down to the level that the MSEB is = being allowed by the State Government to pay. Here are the bald facts. Thir= ty one per cent of the power generated by the MSEB is stolen or lost during= transmission. The balance 69 per cent is bought by 12 million paying consu= mers, of whom, by government orders, 10 million receive subsidised electric= ity. Chief of these are the so-called agriculturists who pay 16 to 25 per c= ent of the average book value cost of generation, the smaller of the small = scale industries, which pay a fraction less than the cost of generation, an= d the bulk of the domestic consumers. The MSEB attempts to recover the loss= by making industry and commercial establishments pay almost double the cos= t of generation.=20 But since a disproportionate share of these consumers is in Mumbai, where t= hey are served by Tata Electric Companies and BSES, in spite of charging 20= per cent more from industrial consumers than they do, the MSEB has been un= able to recover costs through cross-subsidisation. Between April 1997 and M= arch 2000, a succession of populist and irresponsible governments have forc= ed the MSEB to dole out Rs. 2,800 crores worth of subsidies. In 2000, the M= SEB was incurring a cash loss of about Rs. 5 crores a day, that is, 14 per = cent of the cost of generation. This was the situation in which Dabhol's fi= rst phase came on stream in June 1999. Since at 90 per cent capacity utilis= ation it would have added only 6 per cent to power generation and, even at = Rs. 5 per unit, the MSEB would have been able to cover the extra cost of En= ron power by raising average tariffs by a mere 5.5 per cent. But there has = been no increase in tariff since September 1998. That is the reason why the= MSEB simply could not face the prospect of buying the additional power tha= t Enron was capable of providing. It, therefore, sought to minimise its add= itional loss by buying barely a third of the Dabhol's generating capacity. = But since the capital charge was fixed, it found that this did not save muc= h. That was when it baulked at paying and began to look for a way to break = the power purchase agreement.=20 The Maharashtra Government's absolute refusal to reduce subsidies or curb p= ower theft spells the death of private power generation, whether by Indian = or foreign companies. This is because Maharashtra is no exception. Each and= every State electricity board is being prevented today from charging an ec= onomic price for power by populist and unstable State governments, while th= e Centre looks helplessly on. As a result, two foreign companies, Cogentrix= and Electricite de France, have already formally pulled out. Thirteen priv= ate power projects with a generation capacity of 6,275 MW have not invested= a single rupee so far despite having achieved financial closure and obtain= ed all necessary permissions. Among them is a third foreign investor, Daewo= o. This has forced the participating banks to cancel their loans to 10 of t= hem.=20 In Maharashtra, two more large plants, Ispat's 1,082 MW plant at Bhadravati= and Reliance's 437 MW plant at Patalganga, which were awaiting the outcome= of the Enron struggle, will now almost certainly be given up. All this is = happening when the country faces a 10 per cent overall and 32 per cent defi= cit in peak power supply. It is still not too late to salvage the Dabhol pr= oject on terms that are fair to the MSEB as well as Enron. The Centre can b= ring down the capital component of the electricity tariff by buying the CNG= terminal, port facilities and re-gasification plant from Enron, and bringi= ng in a strategic partner to run it as a separate enterprise. This will bri= ng the cost of the power project down from $2.8 billion to $2.2 billion. Th= e capital charge on the MSEB will come down by over 20 per cent and, since = capital charges are 55 to 60 per cent of the tariff, the cost of electricit= y will come down by 12 per cent.=20 When the second phase of the plant is complete in six months or so, at 90 p= er cent of capacity utilisation, the cost of power will come down to Rs. 3.= 15 to 3.20 per unit. This will be the lowest for a new plant in the country= . Second, since only three quarters of the equity and debt capital have bee= n raised abroad, and approximately the same proportion of running costs is = incurred in foreign exchange, only this proportion of the total tariff shou= ld be pegged to the exchange rate. This will substantially moderate the fut= ure increase in power costs for Enron. But even this settlement will requir= e the State Government to raise the average tariff to a point where it will= absorb the marginal cost of generating electricity from new plants. The Ce= ntre will have to point this fact and take measures to enforce this rule of= pricing throughout the country.=20 ---------------------------------------------------------------------------= ------------------------------------------------------------- THE FINANCIAL EXPRESS, Tuesday, May 22, 2001 Centre calls meet on May 25 to resolve termination notice crisis, Sanjay J= og THE BJP-led Central government, which has come under severe attack for its = not-to-worry attitude, has finally decided to act and has convened a crucia= l meeting on May 25 to take stock of the situation in the wake of issuance = of preliminary termination notice (PTN) by the Dabhol Power Company (DPC) t= o the Maharashtra State Electricity Board (MSEB). The meeting would be atte= nded by the officials from the union ministries of finance, power, oil and = natural gas, Maharashtra government and the MSEB. It is likely that the DPC= officials would also be invited for the May 25th meeting in a serious bid = to send a "positive" signal across the world. Union minister of state for e= nergy Jayavantiben Mehta confirmed the May 25 meeting and told The Financia= l Express that the Centre would always try to help the state government fin= d a way out. "However, the signatories for the power purchase agreement - = the MSEB and DPC - should first try to overcome the crisis and then and th= en only can the Centre intervene," Ms Mehta said. "Various options can be c= onsidered to resolve the Dabhol imbroglio," Ms Mehta said in a telephonic c= onversation. However, she declined to divulge any further details. Sources said that Ms Mehta, in the absence of cabinet minister Suresh Prabh= u who is abroad, took a lead and briefed Prime Minister Atal Behari Vajpaye= e and finance minister Yashwant Sinha after the issuance of the PTN by DPC.= Ms Mehta is believed to have stressed the need for a meeting of all partie= s involved in the Dabhol project. The May 25 meet was fixed as Mr Prabhu is= expected to reach New Delhi on late May 23 or early May 24. In addition to= this, the Centre wants to wait until it receives a briefing from its nomin= ee and former bureaucrat AV Gokak who would attend the May 23 meeting of th= e Madhav Godbole renegotiation committee. In a related development, the MSE= B on Monday has sent copies of the PTN to the respective union ministries f= or their perusal. MSEB's top officials, comprising chairman Vinay Bansal on= Monday closeted with its legal advisors to examine the PTN and its impact.= State chief minister Vilasrao Deshmukh said that his government has also s= ought legal opinion on the issuance of PTN. ---------------------------------------------------------------------------= ---------------------------------------------------------------------------= -------- THE ECONOMIC TIMES,Tuesday, May 22, 2001 FIs seek Centre's intervention in DPC-MSEB row FOLLOWING Enron-promoted Dabhol Power Company's issuance of the preliminary= termination notice to the Maharashtra State Electricity Board, its Indian = lenders have once again decided to seek the Centre's intervention to solve = the imbroglio. "Like our earlier efforts, even this time, we wish that the = Union government intervene and help defuse the entire crisis amicably," fin= ancial institution sources said. Indian lenders, led by Industrial Developm= ent Bank of India and a consortium of several banks -- including State Bank= of India and ICICI -- have lent around $1.4 billion of DPC's $3-billion, 2= ,184-mw project in Dabhol. In fact, the sources said, IDBI, along with the = global lenders, had written to Union finance secretary Ajit Kumar in the fi= rst week of this month, seeking the Centre's intervention to direct MSEB an= d the Maharashtra government to pay dues of up to Rs 213 crore towards Nove= mber and December 2000 bills "We had also asked the Centre to convince MSEB= , and restrain it from issuing a termination notice to DPC," they said.=20 However, Kumar in his reply, had put the ball in the lenders' court and ask= ed the Indian FIs to take "the course deemed fit to them in this case". Wit= h reference to the notice, sources said the Indian Fis had been very critic= al of the move and that they had voted negative when DPC had sought for a m= andate by May 18, during the three-day tele-conferencing of all the lenders= . "We think the matter is a not a boxing match, but a commercial dispute, w= hich could be solved by negotiations," they said. Expressing doubts about f= urther funding to DPC, in view of the notice, sources said: "We have to thi= nk whether they can disburse the remaining 20 per cent funds of around $250= million following the PTN." The Indian FIs were also upset about the fact = that DPC did not wait for the voting scheduled to be completed on Monday, a= s it had received the required mandate from ABN-AMRO-led offshore consortiu= m. "We are sure that the foreign lenders must have exercised their vote on = May 18 night itself, immediately after the end of the tele-conference," the= y added. "This proves that DPC had already made up its mind over the PTN, b= ut such a hasty step will not deter us Indian lenders to vote against the = PTN," the lenders said.=20 DPC had also convinced the foreign lenders that the state government had br= eached the PPA and the very fact that the government constituted the review= committee indicated that it did not want to support the agreement, the sou= rces said. Moreover, in DPC's April 25 London board-meet, an IDBI official = had tried to convince the foreign counterparts to refrain from PTN, and req= uested DPC to resort to re-negotiation. (PTI) ---------------------------------------------------------------------------= ---------------------------------------------------------------------------= ------- THE ECONOMIC TIMES, Tuesday, May 22, 2001 Maha seeks legal opinion on termination notice THE MAHARASHTRA government has sought legal opinion on the preliminary ter= mination notice served by Enron promoted Dabhol Power Company to the State = Electricity Board. "We have asked our officers to take legal opinion and ac= cordingly we will pursue the matter," chief minister Vilasrao Deshmukh told= reporters on the sidelines of the conference of chief ministers on WTO agr= eement here on Monday.=20 Stressing on resolving the tangle by way of renegotiating the power purchas= e agreement, he said that Mahrashtra State Electricity Board had not slappe= d another Rs 400 crore penalty notice on the US energy company. "No notice = has been given. I talked to MSEB chairman who said that no notice has been = given," he said. Earlier MSEB sources were reported to have said that the b= oard had decided to go ahead with its decision to slap yet another Rs 400 c= rore penalty on DPC for mis-declaration and default on the availability of = power. The proposed penalty is in the wake of DPC's inability to produce po= wer on February 12 and March 13 as per MSEB's demand in stipulated time of = three hours as per the power purchase agreement, they said. (PTI) ---------------------------------------------------------------------------= ---------------------------------------------------------------------------= -------- THE FINANCIAL EXPRESS, Tuesday, May 22, 2001 Domestic DPC lenders seek Centre's advice on course of action=20 THE domestic financial institutions (FIs) led by Industrial Development Ban= k of India (IDBI) have asked the Centre to advise them on the further cour= se of action, in the backdrop of both the Dabhol Power Company (DPC) and th= e Maharashtra State Electricity Board (MSEB) serving each other preliminary= termination notices (PTN) for the $3 billion power project. This is despit= e the fact that Mr Ajit Kumar, finance secretary, in his earlier reply to t= he FIs' letter had put the ball back in the lenders' court, asking them to = take "the course deemed fit for them in this case." The domestic lenders ha= d also asked the Centre to convince MSEB, and restrain it from issuing a PT= N to DPC. "Like our earlier efforts, even this time, we hope the Union gove= rnment would intervene and help defuse the crisis amicably," sources in fin= ancial institutions said. Indian lenders led by IDBI and a consortium of several banks including the = State Bank of India and ICICI have lent around $1.4 billion out of DPC's to= tal $3 billion 2,184 mw project in Dabhol. In fact, the sources said, IDBI= , along with the global lenders, had written to the union finance secretary= Ajit Kumar in the first week of this month, seeking Centre's intervention = to direct MSEB and the state government to pay dues up to Rs 213 crore towa= rds the November and December 2000 bills. With reference to the PTN, source= s said the Indian FIs been highly critical of such a move and that they ha= d voted negative when DPC had sought a mandate by May 18, during the three = day tele-conferencing of all lenders. "We think the matter is a not a boxin= g match, but a commercial dispute, which could be solved by negotiations," = they said. ---------------------------------------------------------------------------= ---------------------------------------------------------------------------= -------- THE HINDU BUSINESSLINE, Tuesday, May 22, 2001 Dabhol lenders draw blank with Finance Ministry , Shaji Vikraman , Balaji C= . Mouli=20 THE Indian lenders to the Dabhol power project, led by Industrial Developme= nt Bank of India (IDBI), have met with a cold response from the Finance Min= istry to its request to the Government to help protect its loan exposure an= d to honour the power purchase and counter-guarantee agreements. The domest= ic lenders, who have a debt exposure of over $1 billion to the project, had= sought the intervention of the Government to resolve the deadlock over the= outstanding payment to the power utility from the Maharashtra State Electr= icity Board (MSEB) and the Maharashtra Government. Indian financial institu= tions and commercial banks will be in a spot of bother as they do not enjo= y the comfort of their exposure to Dabhol Power Company (DPC) being covered= under the counter guarantee agreement.=20 The threat to the FIs has now arisen because of the preliminary termination= notice under Sec.17 of the power purchase agreement has been served by the= project sponsor. The counter-guarantee agreement covers only the foreign l= enders. According to the agreement, the foreign debt component equivalent t= o the foreign equity in the project is guaranteed free of cost. For the rem= aining part of the foreign debt, the sponsor would have to pay an interest= charge of 1.2 per cent on a reducing balance basis.=20 The Indian lenders to the project is led by IDBI, which has advanced funds = aggregating Rs 1,700 crore, and includes ICICI, IFCI, State Bank of India a= nd Canara Bank. Besides the rupee loans, IDBI has provided a guarantee for = a $200-million line of credit extended to DPC by the US Exim Bank. Accordin= g to senior Government officials, the Ministry has taken the view that the = Indian lenders would have to act on their own in this case as it is their c= ommercial judgement which prevailed when the loan was disbursed at high int= erest rates to DPC. ``Prior to sanctioning of the loan, they never approach= ed the Government. After the mess, they want the Government to bail out the= m. It only reflects their short-sighted approach,'' a Ministry official sai= d. The consortium of lenders to the Dabhol project want the MSEB and the Ma= harashtra Government to increase the escrow cover and also the line of cred= it to DPC. The Maharashtra Government has, however, refused to oblige sayin= g that the company had already invoked politicial force majeure. ---------------------------------------------------------------------------= ---------------------------------------------------------------------------= -------- THE TIMES OF INDIA,Tuesday, May 22, 2001 Re-negotiation best: Deshmukh; lenders' SOS to Centre=20 ``The (best) solution lies in an amicable settlement,'' remarked Maharashtr= a CM Vilasrao Deshmukh to journalists' queries here on Monday regarding th= e Enron standoff. The CM, who was here at the meeting called by the PM to d= iscuss India's position at the WTO talks on agricultural trade, reiterated = the basic point: His government was keen on negotiating and that was the on= ly way out. The Maharashtra electricity board just cannot afford to buy Enr= on's generation at the current price, he said. Queried on the latest set of= notices between the two parties, Deshmukh said what was being aired verbal= ly is not so important. What is more to the point is a willingness to find = a way out. PTI adds from Mumbai: Following Enron-promoted Dabhol Power Company's issua= nce of the preliminary termination notice (PTN) to MSEB, its Indian lenders= have once again decided to seek the Centre's intervention to solve the im= broglio. "Like our earlier effort, even this time, we wish that theUnion go= vernment intervene and help diffuse the entire crisis amicably", FI source= s said. The Indian lenders, led by IDBI and a consortium of several banks i= ncluding SBI and ICICI have lent around $ 1.4 billion out of DPC's total $= 3 billion 2,184-MW project in Dabhol.=20 In fact, the sources said, IDBI along with the global lenders had written t= o Union finance secretary Ajit Kumar in the first week of this month, seeki= ng the Centre's intervention to direct MSEB and the Maharashtra government = to pay dues up to Rs 213 crore towards the November and December 2000 bill= s."We had also asked the Centre to convince MSEB, and refrain it from issu= ing a termination notice to DPC," they said. However, Kumar in his reply, = had put the ball in the lenders' court and asked Indian FIs to take "the co= urse deemed fit to them in this case". ---------------------------------------------------------------------------= ---------------------------------------------------------------------------= ------- THE HINDU BUSINESSLINE, Tuesday, May 22, 2001 Uncertainty over DPC presence at Godbole meet=20 THERE is uncertainty about Dabhol Power Company (DPC) officials' attendance= at the second negotiation meeting on May 23 chaired by Dr Madhav Godbole. = The company had said that the Godbole committee report ``should not form th= e basis for any future discussions''. ``They (DPC) have not informed us abo= ut staying away from the meeting. So we will assume that they will be prese= nt. But if they do not come, it will be the end of the dialogue for negotia= tion,'' a senior State Government official said. The Centre's representativ= e, Mr A.V. Gokak, will attend the May 23 meeting, the official said.=20 DPC had objected to the absence of the Centre's representative at the last = meeting. ``GoI did not even bother to send a representative to the initial = renegotiation committee meeting on May 11,'' the company had said when issu= ing the preliminary termination notice. DPC's spokesperson declined to comm= ent on being asked if the company's representatives would attend the secon= d meeting of the Godbole panel. Meanwhile, senior officials of the State Go= vernment have expressed concern over neglect in appointing the third concil= iator to enable the conciliation process between the Union Government and D= PC. ``The conciliation process has to be completed within 60 days, which me= ans the deadline falls on June 7,'' a senior State Government official said= . ``But they're still looking for the third person,'' he said. In its state= ment when issuing the preliminary termination notice on Saturday, the compa= ny has put down the Union Government's ``failure to respond positively to D= PC lenders' written requests for assurances'', as one of the reasons for is= suing the notice. ---------------------------------------------------------------------------= ---------------------------------------------------------------------------= ------- THE INDIAN EXPRESS, Tuesday, May 22, 2001 Pawar urges Centre to buy Enron power NATIONALIST Congress Party president Sharad Pawar has urged the Union Gover= nment to play a supporting role in the Enron controversy by purchasing addi= tional power from the Dabhol Power Company (DPC). Speaking to mediapersons,= Pawar said Maharashtra was not in a position to purchase 2000 MW of power = from phase II of DPC and the Union Government should come forward to purcha= se it. He said the government could purchase power from DPC as several stat= es were facing a shortage. The NCP leader said the DPC had not taken a wise= step by sending a notice to the Maharashtra State Electricity Board (MSEB)= . It should have sorted the issue through negotiations. When specifically a= sked about the Godbole Committee set up by the Maharashtra government, Pawa= r said the views of Godbole on the issue were known to all. But three of th= e members resigned from the committee, putting a question mark on its funct= ioning. Pawar said it would be wise for both the DPC and Maharashtra government to = solve the issue through discussions, instead of fighting a legal battle. As= ked whether he would persuade the Union Government to change its stand, Paw= ar said Chief Minister Vilasrao Deshmukh and Energy Minister Padmasinh Pati= l were making efforts in the same direction. He said the DPC should also ha= ve brought down its purchase rates in view of the complications, adding tha= t it would not be in the interests of Maharashtra if the matter was taken u= p to the tribunal. He said the issue would send wrong signals to the foreig= n investors, which will ultimately halt the economic growth of the country. ---------------------------------------------------------------------------= ---------------------------------------------------------------------------= -------- THE FINANCIAL EXPRESS, Tuesday, May 22, 2001 MSEB not to pay capacity charges until receipt of Rs 401-crore rebate from = DPC=20 THE Maharashtra State Electricity Board (MSEB), which would slap a rebate o= f nearly Rs 800 crore for misdeclaration and default on the availability of= power in February and March by the DPC, has threatened not to pay capacit= y charges until DPC makes the payment of rebate of Rs 401 crore charged fo= r the January 28 default. MSEB sources told The Financial Express that it h= as paid a whopping Rs 1,806 crore to DPC towards capacity charges during M= ay 1999 and February 2001, on a monthly basis. However, the successive occurrences of shortfall in actual generation under= mines the entire basis of the power purchase agreement (PPA) and the "MSEB = is entitled to be discharged from further performance in terms of the PPA, = due to DPC's failure to perform its obligations in terms of the PPA," sourc= es said. MSEB on or about March 27, 2001 paid "under protest" the capacity = payment of about Rs 83.04 crore for the month of February 2001, having take= n a view that in terms of the PPA, the rebate would be adjusted in May 2001= . "However, given the fact that DPC has raised disputes in order to avoid = and/or delay adjusting the rebates and the successive breaches by DPC, MSEB= may be entitled to be relieved of its future obligations - making capaci= ty payments until such disputes are finally determined," MSEB sources said= . In view of DPC's admission with regard to failure on its part and its incap= ability to adhere to the provisions of Schedule 6, and/or the inability of= the Dabhol plant to perform according to the Dynamic Parameters and Operat= ing Characteristics, DPC is not entitled to insist that its December 2000 b= ill (Rs 102 crore) should be paid in full without any adjustment. According= to the MSEB, the clear intent of Clause 11 (b) (ii) of the PPA is that DPC= would compute the rebate in accordance with Clause 10.2 and the amounts wo= uld be duly adjusted in the months of January, May and September, and that,= thereafter, if after such adjustment, further amounts are still payable to= MSEB, the same would be paid and/or adjusted against future capacity payme= nts. "This breaks down if DPC refuses to calculate the rebate, make necessa= ry adjustments, make payment, and resorts to the dispute resolution procedu= re. Therefore, MSEB is entitled to adjust and/or withhold amounts as it has= a legitimate claim against DPC," sources said. ---------------------------------------------------------------------------= ---------------------------------------------------------------------------= -------- THE ECONOMIC TIMES, Tuesday, May 22, 2001 Finding new buyers key to DPC's future THE MAHARASHTRA government and the Centre are exploring the possibility of = an Indian company taking over the Dabhol Power Company, the subsidiary of U= S energy major Enron that is mired in a major power tariff dispute with the= Maharashtra State Electricity Board. According to Maharshtra government of= ficials, the sale of Enron's stake in DPC to an Indian company in the priva= te or public sector is being seen as the honorable way out of the dispute b= etween the company, the government and the MSEB. According to a source, the= Maharashtra government is under pressure from lending agencies, foreign in= vestors and the US government to save the $3-billion Dabhol project. Abando= ning it could result in payouts of about Rs 17,000 crore to Enron, he said.= =20 Under the counter guarantees provided by the Indian government, compensatio= n would include returns on investment made by Enron in the DPC project. Fin= ancial institutions like the Industrial Development Bank of India, ICICI an= d the State Bank of India could face major losses as they have given guaran= tees to international lenders, officials say. Maharashtra has already begun= to cover its flanks by charging DPC with providing insufficient services a= nd installing substandard equipment to prevent its facility from generating= 95 per cent power. A penalty of Rs 401 crore was slapped on the company la= st month for not providing power to MSEB at a notice of three hours. It has= now been decided that a notice for a similar penalty will be sent in June = as well, officials here said.=20 MSEB officials have been quoted as saying that no bills would be paid to th= e company after the April bill of Rs. 1.39 billion. The bills for the remai= ning months would be adjusted against the penalty. With Enron hardening i= ts stand, it is possible the company could stop power supply from June, the= y indicated. Although the DPC has issued the preliminary termination notic= e, the actual process of terminating the PPA could take as long as six mon= ths. "This initiates the process of terminating the power purchase agreemen= t with the Maharashtra State Electricity Board," DPC said.=20 Simultaneously, it said it was open to "constructive" negotiations on the i= ssue. The DPC is demanding that the Central government participate in the n= egotiations between Enron and MSEB or provide credit support to purchasers = of its power as a pre-condition to talks. "While a lasting and feasible so= lution to this issue may be possible, it can only occur if the parties cont= ractually bound to purchase DPC power (MSEB with guarantees from state and = central government) are willing to either purchase themselves or find "othe= r" creditworthy entities," the company said.=20 Enron also said the report of committee on renegotiating the power purchase= agreement should not be the basis for discussions. The stalemate in the pr= oject follows the Maharashtra government disputing payments for power purch= ased by the MSEB from the DPC. The government cleared its February and Marc= h outstanding of Rs 113 crore and= Rs 134 crore respectively but under protest. The DPC currently produces 74= 0 MW of power. This is to go up to 2,184 MW if and when the second phase of= the project goes on stream. (IANS) ---------------------------------------------------------------------------= ------------------------------------------------------------- THE FINANCIAL EXPRESS, Tuesday, May 22, 2001 DPC to gain from ST waiver on naphtha, Sanjay Jog THE Maharashtra government has waived the 5.4 per cent sales tax on napht= ha supplied by Indian Oil Corporation (IOC) for Dabhol Power Company (DPC).= Mantralaya sources told The Financial Express that the decision would be= nefit not only DPC but also other electricity utilities operating in the s= tate. Although the energy, finance and planning departments have cleared t= he file pertaining to this issue, it would be taken up for the Cabinet's a= pproval only at its meeting on May 23. Sources said instead of considering= the DPC's case in isolation, the state government had taken a broader vie= w in offering the naphtha sales tax waiver to utilities operating in the s= tate. "The objective is to refrain these utilities from procuring naphtha from G= ujarat. Had these utilites procured naphtha from Gujarat, the latter woul= d have earned a revenue of over Rs 40 crore annually," the sources added. = Analysts said the state government's move would draw criticism especially = from the anti-Enron lobby. According to them, although it is a coincidence = that the file in this regard was cleared after the issuance of preliminary= termination notice (PTN), the government would have to convince its const= ituents which have been pressing for the scrapping of the Dabhol project.= =20 Ironically, the state finance and planning department had, in the past, que= stioned naphtha sales tax waiver on the grounds that its approval for DPC= in particular would not be possible as the Shiv Sena-BJP alliance governm= ent had already reduced the sales tax on naphtha from 15 per cent to 4 per= cent in 1995. However, the department relented and is believed to have agr= eed to clear the file by making it clear that the waiver will be applicable= to all utilities and not DPC in particular. Since January this year, DPC = has been pressing for the full waiver of sales tax on the 1.2 million tonne= of naphtha procured from IOC during the calender year 2001.=20 The company had pointed out that any tax levied on the naphtha purchases wi= ll lead to tariff increase and would add to the burden on the consumers "a= s the cost of fuel is passed to MSEB under the power purchase agreement". = DPC had said MSEB would have to bear an additional burden of about Rs 71.5= crore in 2001 as a result of the net impact of local sales tax. "Given the= effect of a tariff increase for electricity consumers in the state, ... gr= ant us full exemption of tax on local purchase of naphtha by issuing neces= sary notification under section 41 of Bombay Sales Tax Act," the company p= resident and ceo Neil Mcgregror had in one of his recent communications to = the state government said. Further, the energy department and MSEB had sup= ported the DPC's stand and had said MSEB was not in a position to take the= additional burden in view of its present precarious finances. The MSEB ha= d requested the state energy department that the finance department should = clear sales tax waiver to DPC "as a special requirment."=20 ---------------------------------------------------------------------------= ------------------------------------------------------------- THE ECONOMIC TIMES, Tuesday, May 22, 2001 Enron sells stake in Dolphin to UAE Offsets US Enron has bowed out of a $3.5-billion project to route Qatari gas to the= United Arab Emirates and sold its stake in Dolphin Energy, the project cha= irman and US firm announced on Monday. Enron sold its stake to the UAE Offs= ets Group for an undisclosed amount. Richard Bergsieker, the US firm's Midd= le East MD, told a news conference in Abu Dhabi that Enron did not believe = it could add much to the project in its current stage. "As the project had = evolved into a strong upstream gas supply project and gas transport and del= ivery, we don't believe there is a lot of value that Enron can add," he exp= lained. "The project requires longterm equity investment in upstream and E= nron is frankly not an upstream company."=20 DEL chairman Ahmed Ali al-Sayegh had earlier said Enron had agreed to trans= fer its 24.5 per cent stake in Dolphin to UOG for an undisclosed amount, ra= ising the UAE firm's stake to 75.5 per cent. TotalFinaElf holds the remaini= ng stake. Patrick Rambaud, TotalFinaElf's senior vice-president for the Mid= dle East, said his firm has formally asked UOG to increase its own stake = in the project. Sayegh, however, said UOG is seeking a different partner. "= We are studying the TotalFinaElf request...(but) there will be another part= ner in the project," he said. "Starting tomorrow, we will begin negotiatio= ns with the global firms who have shown interest in acquiring a state. The= y are more than eight companies." He refused to name the firms but said "ev= erybody who is working in the Gulf is interested. We are not in a hurry to = choose a partner." Qatar and DEL in March signed a "commercial term sheet a= greement" which outlined the conditions of the upstream agreement for the l= ong-awaited $3.5bn project. The two sides aim to sign a production-sharing = agreement by the end of the third quarter '01. Sayegh said they would stic= k to that deadline. "The latest date is mid-September," he added.=20 Qatar, which sits on the world's third largest gas reserves, is seeking to = boost its natural gas exports to the Gulf after investing billions of dolla= rs to tap its vast gas riches. The gas deal will entitle DEL to develop a t= ract of Qatar's giant North Field and produce up to two billion cubic feet = per day. UOG is to invest $2 billion in developing the tract, drilling and = setting up of production facilities. The remaining $1.5 billion would be in= vested to lay a pipeline and set up receiving terminals at Dubai's Jebel Al= i and Taweelah in Abu Dhabi. First gas is targeted to reach the UAE capital= Abu Dhabi by late '04 or early '05. 1-1.5 billion cfd of Qatari gas would = be used by utilities in Abu Dhabi and the remainder supplied to Dubai. DEL = has started inviting local, regional and international companies to prequal= ify for five contracts between May 19-23 following the establishment of a t= echnical project team to oversee the implementation of the first cross-bord= er gas pipeline project in the Middle East. Engineering and construction ma= nagement firms will have two weeks to submit their prequalification stateme= nt for each contract after the date of the official announcement. (Reuters) ---------------------------------------------------------------------------= ------------------------------------------------------------- BUSINESS STANDARD, Tuesday, May 22, 2001 FOCUS: THE ENRON CONTROVERSY, Dabhol: more heat than light A V Rajwade highlights some basic errors of omission and commission in the = Enron deal The general impression propagated by the critics of the Enron-promoted powe= r project, and often accepted by the man on the street, is that MSEB and, a= s a by-product, the citizens of Maharashtra, are victims of very high-cost = power; that the agreements were signed at the behest of corrupt politicians= ; and that, therefore, the best course of action is to tear up the agreemen= ts and forget about it. But the first phase of the power plant has been in = operation for a few years, and the second phase is also reportedly 92 per c= ent complete. These are genuine productive assets that the economy will eve= ntually need, and cannot be wished away. Nor can the country afford to rene= ge with impunity, solemnly undertaken financial obligations. In my regular = weekly column (World Money, which appears on Mondays), I have been a suppor= ter of foreign investment and had criticised the initial stance of the BJP-= Shiv Sena government, which had terminated the contract, only to revive the= project on a much bigger scale, on the basis of the efforts of a renegotia= tion committee appointed by it.=20 The controversy has once again become front-page news, given the inability = of MSEB to pay the dues of Dabhol Power Company (DPC). In turn, the MSEB ha= s served notices for what it claims are dues from DPC because of defaults, = and the whole matter has become a first-class mess. The recent report of th= e Godbole Committee is certainly a step in the right direction, and the gov= ernment has appointed another group, once again led by Mr Godbole, to reneg= otiate the contracts with DPC/Enron. Theoretically of course there are thre= e possible culprits - politicians, a devious Enron that corrupted them, or = a system whose competence (and professional commitment) was less than adequ= ate to evaluate the project properly.=20 To be sure, the committee has, while commenting on how the tariff was shown= to be within government of India norms, felt "this combination of circumst= ances to be beyond the realm of coincidence". This is the closest it has co= me to questioning the motives of those involved. But before drawing conclus= ions, consider some basic issues. Demand estimation: The report concludes t= hat gross errors were committed in estimating the total amount and nature o= f the demand for power in the state. The growth in the high tariff group ha= s been very limited (surely this was foreseeable - at a particular MSEB tar= iff, industry finds it cheaper to generate captive power), while low-tariff= demand has grown steadily.=20 Again, the report argues that, on the supply side, MSEB had enough generati= ng capacity available for the so-called "base load", to meet which plants h= ave to run 24 hours a day. MSEB really needed generating capacity, even acc= ording to its own demand projections, for the intermediate and peak loads. = While the fuel envisaged to be used in DPC is ideal to take care of this, t= he plant load factor (PLF) used for cost and tariff calculations is complet= ely unrealistic for such a power plant. Were these major errors in demand e= stimation and so on or political failure or system weaknesses?=20 Return on equity: If there were gross errors in the demand-supply projectio= n side, the assured 16 per cent return on equity, (at 68.5 per cent PLF) af= ter tax, is also open to serious questioning. What is truly amazing is that= the return was the same in percentage terms irrespective of whether the eq= uity was contributed in rupees, dollars or perhaps even yen -and that too i= n the respective currencies! The Maharashtra government is not responsible = for this: it is government of India policy, cleared at the highest minister= ial levels. Before adopting the norm, did we use concepts like Capital Asse= t Pricing Model (CAPM) which show that equity market returns in all countri= es are not identical; that they crucially depend on the risk-free rate of i= nterest which is different for each currency.=20 Again, there are robust benchmarks available for quantifying the political = risk that a foreign direct investor faces (for example, the premium charged= for different countries by the Multilateral Investment Guarantee Associati= on of the World Bank). Was such analysis done before the 16 per cent tax-fr= ee norm, and exchange-rate protected returns, were assured? If not, who is = responsible? The discount rate: I started thinking about the discount rate = used in the Power Purchase Agreement (PPA), for the calculation of the fixe= d charge, on a simple issue. If for the first phase, the fixed charge is Rs= 95 crore per month or, say, Rs 1,000 crore per annum, and is payable for t= he next 20 years, what should be the rate of discount at which the present = value of these payments would be roughly Rs 3,000 crore, which is the cost = of the first phase?=20 Moreover, the bulk of the fixed charge is indexed to the dollar-rupee excha= nge rate - in other words, for all practical purposes, the fixed charge is = a dollar-denominated outflow as far as MSEB is concerned. It seems that now= here is the discount rate used for calculating the present value of the fix= ed charge outflows specified or documented! Empirical analysis seems to ind= icate that the rate is about 17 per cent per annum! It is worth noting that= even in the dark days of monetary tightness in 1996, a 17 per cent discoun= t rate would be too high for simple rupee obligations guaranteed by the gov= ernment of India - it is absurd for discounting a stream of what are effect= ively dollar payments.=20 Elementary financial economics requires that for calculating the present va= lue of a dollar stream, the discounting rate should be based on the US trea= sury bond yields of corresponding duration. This has never been more than 7= per cent after 1994. For the desired present value, therefore, the correct= fixed charge needs to be perhaps 40 per cent of what it is now! There is a= similar logical flaw in the dollar-denominated O&M charges being subject t= o Indian inflation. While the latter point has been commented on in the rep= ort, the former has not been adequately weighed.=20 To be sure, this is something of a technical issue and one cannot expect th= e average minister to understand it. The actual discount rate used has infl= ated the fixed charges enormously: one suspects that Enron knew this, hence= the obvious efforts to hide the number. But surely the MSEB and other offi= cials and advisers dealing with the negotiations, should have appreciated t= he crucial importance of the number, and insisted on ascertaining the disco= unt rate? It could of course be argued that the political pressure was such= that the civil servants were silenced from voicing any objections they may= have had on the various issues. Is there any evidence in the notings on va= rious papers to support that the issues of financial economics pertaining t= o the case had been pinpointed? How is it that the impracticability, nay im= possibility, of more than half of MSEB's revenue being escrowed for a singl= e plant was not noticed by anybody? Were not at least some of the issues im= portant and significant enough for the financial health of MSEB, and indeed= the Maharashtra government, for at least one bureaucrat to stand up? A way out: The Godbole committee has recommended a package of proposals to= resolve the tangle. One would like to add a suggestion worth exploring. Th= is is based on what happened in the now celebrated dispute between Procter = & Gamble (P&G), the US multinational, and Bankers Trust Company (BTC) in th= e United States. P&G had entered into various, complex derivative contracts= with BTC. When it incurred huge losses, it sued BTC on the grounds that it= was persuaded to sign contracts the implications of which it had not under= stood properly, and that therefore the amounts already paid by it should be= refunded and the contracts voided.=20 Admittedly, this was a novel plea to be taken by a litigant of P&G's standi= ng. Unfortunately, the case was settled out of court with BTC paying $ 100 = million-plus to P&G. But if P&G can claim that it did not understand the im= plications of a financial contract, so surely can MSEB, particularly in rel= ation to discounting rate or the return on equity, and demand the contracts= be voided or renegotiated? But it is the Godbole Committee that should hav= e the last word on the issue: "The Committee would like to state strongly t= hat none of the solutions espoused for IPPs ... and DPC in particular is te= nable without the reform of MSEB, especially its distribution business." Th= at, perhaps, is the crux of the controversy. ---------------------------------------------------------------------------= ------------------------------------------------------------- THE TIMES OF INDIA, Tuesday, May 22, 2001 Business Unusual=20 Is India serious about the business of business? Two recent developments ra= ise this question, and the answer may well determine whether India can achi= eve its true economic potential or will continue to lurch along, doing the= best it can under the circumstances. The first is the Dabhol Power Company= 's issuance of a pre-termination notice to the Maharashtra State Electricit= y Board. This is the first step in a process that could eventually culmina= te with Enron pulling out of India. Many people might celebrate that, sinc= e the deal has been riddled with controversy right from the start. So, we = should perhaps remind ourselves why the need was felt for such a project = - because lack of power was accepted as one of the primary infrastructural= problems in India. After all these years, things have only got worse. Than= ks to politically-dictated tariffs, inefficiency and widespread theft, our = state electricity boards collectively owe central power utilities Rs 26,00= 0 crore. Given the financial woes of their primary consumer, the SEBs, prod= ucers can hardly be blamed for seeking some sort of financial safeguards be= fore they set up shop. The question then arises whether the safeguards Enro= n sought were prohibitive. It is high time the Centre takes a clear stand o= n the issue. It should either clearly state that the Enron deal is good for= India, in which case it should bend over backwards to save it. Or it shoul= d flatly say the deal is unviable, and mount a public relations campaign to= minimise the effect of the contract being scrapped on other potential inve= stors. But before that, it should explain why a Central counter-guarantee w= as issued in the first place. The second development is the steadily intensifying confrontation between t= he government and the trade unions. As in the case of Enron, there are two = clearly polarised camps talking at, not to, each other. Predictably enough,= the unions are upset about the proposed move to make it easier for organis= ations to fire workers. The fact that there is also a proposal to treble th= e retrenchment compensation from 15 days to 45 days per year of completed s= ervice is being ignored. The logic of reforming labour laws is well-known: = it is necessary to make Indian industry globally competitive; it will make = both the labour and capital markets more flexible, which will create faster= growth; states which are ostensibly labour-friendly only end up driving aw= ay industry and increasing unemployment. Repeating these arguments, unfortu= nately, amounts to preaching to the converted. People who support labour la= w reforms already know all this, while the trade unions simply aren't willi= ng to listen. So what can be done? The only way out is for the government t= o bypass the self-appointed representatives of the disadvantaged, and start= hardselling reforms directly to this constituency. It should step up the c= ommunication effort, rather than trying to present reforms as a fait accomp= li, which can only generate suspicion and resentment. It should admit that = in its effort to be a benevolent parent, it botches up too many things. So = it makes more sense for it to focus on just a few things, like education, l= aw and order, health and nutrition, and providing safety nets for the dispo= ssessed. If the government can improve its performance in these areas, it m= ight find people less fearful at the thought of taking responsibility for = themselves. ---------------------------------------------------------------------------= ------------------------------------------------------------- THE FINANCIAL EXPRESS, Tuesday, May 22, 2001 What happens when ignorance is bliss=20 Ministry of Power ignored Planning Commission's advice on direct sale , G = V Ramakrishna One of the solutions to the problems associated with the power purchase agr= eements (PPAs) between independent power producers (IPPs) and the state ele= ctricity boards (SEBs) now being proposed is the direct sale of power by IP= Ps to blue-chip industrial customers. The Godbole Committee also is reporte= d to have suggested that this should be explored in the case of the Dabhol = project. The idea is not new. It was in fact proposed when the writer was a= member of the Planning Commission in 1994 and was ignored by the power min= istry in its preoccupation with the Enron project and the need to justify = the one-sided agreement as the only way of solving the power shortage in th= e country. The proposal made in 1994 also addressed the objection now being raised by = the SEBs that such direct sale will diminish their revenues from industrial= high tariff users and their capacity to cross-subsidise the cost of power = supplied to the low- or zero-tariff consumers in the domestic and agricultu= ral sectors. The proposal was based on four parameters: SEB power capacity,= pattern of supply to various users, the tariff structure and the extent of= cross subsidisation. These parameters would determine how much additional = power each state can afford and the extent to which direct supply can be ma= de to industrial users. The outline of the proposal is as follows: If, say, the existing power capacity in a state is 4000 mw and 25 per cent = goes to industrial users, 35 per cent to the domestic sector and 40 per cen= t to the agricultural sector, and the tariff structure requires government = support even after cross-subsidisation, then the state should be told that = if the SEB was prepared to yield 50 per cent of its industrial demand to th= e IPP for direct supply, with the SEB charging for wheeling the power, the = tariff rates should be raised for the non-industrial sectors and the state = should be prepared to subsidise the loss of revenue, if it actually occurs,= to the SEB. The new capacity will then be determined not arbitrarily but w= ith reference to ground realities in each state. In short, the states will get additional power to the extent they need and = deserve. There will be no excess capacity created by the IPP as in the case= of Maharashtra after DPC started generating in the first phase itself. It = was also pointed out that by yielding a given percentage of demand from exi= sting industrial users the loss of demand would materialise only when the = new project is completed by the IPP in about three years' time and not imme= diately. In the meantime the state could attract new industries with refere= nce to the additional capacity that will become available to it at the end = of three years and, if such new demand materialises, there will be no net l= oss of demand or revenue to the SEB. The new arrangement will involve tripartite agreements between the IPP, the= industrial consumers and the SEB which will agree to wheel the power at a = predetermined rate. The IPP can have the comfort of getting a PPA with the = industrial consumers based on acceptable bank guarantees or escrow accounts= of the consumers. The consumers will have the comfort of getting the requi= red quantity of power of the right quality. The SEB will also have time to = set up new distribution facilities to wheel the power through dedicated lin= es if necessary, and also to the new industries that will be set up to take= the loads that will be released by hiving off the existing industrial user= s. SEBs can be net gainers by getting wheeling charges and by getting a mor= e rational power tariff structure or government subsidy for cross-subsidisa= tion.=20 Having thus established the quantum of additional capacity to be establishe= d in each state, which can be calculated with reference to the parameters m= entioned above, the IPPs should have been asked to send competitive bids fo= r the determined capacity and not have memoranda of understanding (MoU) for= their own notional capacities at their own rates without any competition. = This arrangement will enable states to get the right amount of additional p= ower at competitive rates and also not need any state or central government= guarantees and will be a purely commercial transaction. There will also be= no occasion for the state to have surplus capacity arising from IPP-determ= ined capacities based on government guarantees. The other advantage will be that new capacities will be in the range of 400= to 6000 MW and they can also be distributed among the states with referen= ce to their demand patterns and willingness to rationalise their tariff str= uctures. The states and their consumers will get power at competitive rates= and in the quantities they need and deserve. The Planning Commission propo= sal had also worked out illustratively how the working of the proposal will= determine additional capacities in a few states and the beneficial impact = on the finances of SEBs in these states. No one has asked the power ministry to explain why this suggestion was not = accepted. It was obviously for the reason that this would scuttle the arran= gements they were keen to have with IPPs for gold-plated projects of high c= apacity beyond the states' needs and at exorbitant rates of return. As the = saying goes, you can wake up a sleeping man but not one who is pretending t= o be asleep. As a result of the power ministry ignoring the proposal of the= Planning Commission the country is paying a high price and eventually the = taxpayer and the consumer will carry the burden in one form or another. Direct transfer to industrial consumers at this stage will be possible only= if the power rates are acceptable to the consumers who are not committed t= o take the power at rates determined under the one-sided agreement with Enr= on. In fact they are asking for direct supply from some of the cheaper sour= ces and the SEB is unwilling to pass on these demands to existing cheaper s= ources and to buy power from the mast expensive source.=20 (Mr Ramakrishna is former chairman of Sebi and the Disinvestment Commissio= n) ---------------------------------------------------------------------------= ------------------------------------------------------------- THE FINANCIAL EXPRESS, Tuesday, May 22, 2001 Learning by undoing=20 Taxpayers will pay for government's folly=20 For a lay person looking at the continuing controversy on Enron's Dabhol Po= wer Company (DPC) it might appear that it is the Maharashtra state electri= city board (MSEB) and the state government that are at fault for not meetin= g their contractual obligations under the power purchase agreement (PPA). I= t would therefore seem natural that DPC has issued a pre-termination notice= to MSEB since MSEB is not paying up on time. But is the story that simple= ? No. There are two reasons for saying this. The first relates to the struc= ture of the PPA, and the second to the groundwork done by MSEB to sustain t= he project. Both Madhav Godbole and EAS Sarma - chairman and member of the= committee that advised the state government on the future course of the pr= oject - are of the view that a proper investigation should be carried out = on the entire deal and into how such a PPA was agreed to. This suggestion d= id not find a place in the final report as it was regarded to be beyond the= committee's terms of reference. Even after signing the PPA, the MSEB did n= othing to improve its financial position to withstand the impact of the pro= ject. This has now started to tell on the state which was once regarded as = a haven for investments. If the idea that the PPA be re-opened is accepted, the DPC forfeits all con= tractual rights. The counter-guarantee will also automatically become nothi= ng more than a scrap of paper. It is, therefore, not surprising that DPC is= not keen on following the recommendations of the Godbole report. Enron, th= e main promoter of the project, is keen to wash its hands of the project an= d repay its foreign lenders so as to maintain a clean image internationally= . There should be no heartburn for the Indian financial institutions on thi= s score, since this is precisely what they agreed to when they financed the= project and also offered guarantees to international lenders. In case the = central government gets pinned down to paying the termination amount, the t= axpayer, whose money it is which will be paid out, has a right to ask why, = by whom and for what reason such a lopsided PPA was entered in the first pl= ace. Why should the consumer be paying now for mistakes made by politicians= and government officials who were ostensibly walking up the so-called "lea= rning curve" in the privatisation of power? ---------------------------------------------------------------------------= ------------------------------------------------------------- THE INDIAN EXPRESS, Tuesday, May 22, 2001 Enron unplugged An effective dialogue can still save the Dabhol project WHATEVER else might be said about Enron's preliminary notice to terminate i= ts Dabhol power project contract, it does at least help to concentrate mind= s. A solution to the problem must be found in six months. That is the time= available before a final termination notice becomes due and final accounts= have to be settled. So Maharashtra and the Centre no longer have the optio= n of letting things drift. A decision has to be taken and taken soon. It wi= ll help that process if Maharashtra and the Centre develop a joint approach= . That has not appeared to be the case so far. The Union Power ministry has= given the impression that the excessive cost of Dabhol power is really Mah= arashtra's problem and there is not much it can do to help. That was the me= ssage from the absence of a representative of the Centre at the May 11 meet= ing of the re-negotiating committee. But with loans worth $1.4 billion from= domestic lenders at risk from termination of the project, and IDBI, ICICI = and the State Bank of India hitting the panic button and urging the Finance= ministry to get involved, the prospects for focussed action by the Centre = have improved. Another round of talks with Enron is scheduled this week. There appear to b= e two solutions to explore. Some experts have suggested that if Maharashtra= does not need more power and is struggling to pay for what is available fr= om DPC at present, the only way out, when DPC Phase II goes on stream, is f= or the power to be sold outside the state. The Union Power ministry has app= arently studied alternative scenarios for the purchase of DPC power but not= found them feasible. When Enron says, despite the termination notice, it r= emains interested in a constructive dialogue it has new buyers in mind and = rules out the other solution which is the one Maharashtra has been working = on. Chief Minister Vilasrao Deshmukh insists on renegotiating terms and is = supported in this by the Godbole committee which has pointed out how the hi= gh cost of DPC power can be brought down. Enron is set against renegotiati= ng terms but needs to be persuaded to be open minded and to look at the ame= nded terms Maharashtra is proposing. Reworking terms, such as all costs being dollar-denominated, looks like the= only realistic way to break the impasse. If Maharashtra cannot afford to p= urchase DPC power it is highly unlikely any other state government will; an= d private corporations will undoubtedly look for and find better options. T= he basic issue is as Deshmukh says, the ''exorbitant power tariff''. The f= irst solution - selling power outside Maharashtra - fails on that ground. A= n effective dialogue with Enron will have to be conducted at a different le= vel. It is more than a dispute about a commercial contract. The political l= eaderships in New Delhi and Washington will be concerned about the fallout = from this dispute on investment flows. New Delhi would like to see more for= eign investment come to this country and Washington would like to see India= 's doors remain open to foreign and American investment. So both capitals s= hould consult about ways of ending the dispute quickly. ---------------------------------------------------------------------------= ------------------------------------------------------------- THE HINDU BUSINESSLINE, Tuesday, May 22, 2001 Messier and messier=20 GIVEN THE LEVEL of acrimony and mutual distrust, it is no surprise that Dab= hol Power Company chose to issue a preliminary termination notice to the Ma= harashtra State Electricity Board, initiating the process to invalidate the= power purchase agreement. It is only the latest in a logical sequence of s= teps taken by Enron, the principal promoter of Dabhol Power Company, over = the last few months. The MSEB and the Maharashtra Government find themselve= s in a corner only because they have been responding with too much of chest= -thumping, macho rhetoric and too little of business and tactical sense. At= all times Enron seemed to be one step ahead of the MSEB.=20 There is a lot at stake in what happens to the project. The MSEB, the Mahar= ashtra Government, the Centre and a whole lot of financial institutions -- = IDBI, ICICI and SBI -- are in for trouble if Enron goes ahead and terminate= s the power purchase agreement. That Enron was moving towards quitting the = project was evident in April when DPC invoked the political force majeure c= lause, while Enron also sought the lenders' approval to issue a notice of t= ermination. Quitting the project also ties in with Enron's decision worldwi= de to get out of managing assets and instead concentrating on trading in en= ergy products.=20 Right from the time Enron was invited by the then Sharad Pawar Government i= n 1992, the Dabhol project has been dogged by controversies. All political = parties are equally responsible for the mess as politics has dominated the = decision-making at all times, when pure economic and business sense should = have prevailed. The present Democratic Front Government in Maharashtra, wan= ting to get back at the Shiv Sena-BJP, got carried away and chose to fight = its battle through the media.=20 Even now, there is time for negotiation. But for this the MSEB and the Maha= rashtra Government, not to mention the Centre, should display sincerity. Th= e effort should be to reopen the power purchase agreement, with Enron's con= sent rather than unilaterally, and see how the tariff can be brought down. = One, it is generally believed that the cost of the regassification facility= is for the entire five million tonnes per annum of gas that Enron proposed= to import and not for the quantum of gas that will be used by the power pl= ant. The negotiations should ensure that the fixed cost covers only that p= art of the regassification facility which is used by the power project.=20 Two, the rate of return for Dabhol Power Company is widely believed to be a= bout 30 per cent, when other independent power producers get only around 1= 6 per cent. It must be seen if this can be brought down, at least to 20-25 = per cent. However, even if the tariff is brought down substantially to, say= , Rs 3.30 per unit, it is doubtful if the MSEB will have the revenues to pa= y for all the power generated at 85 per cent plant load factor. For that to= happen, the MSEB should be reformed -- the technical losses and theft mus= t be drastically cut, and the tariff rationalised to eliminate cross-subsi= dy.=20 The preliminary termination notice may also be a chance for the MSEB and th= e Maharashtra Government to extricate themselves. However, they will need = the cooperation of the Centre and the financial institutions. The notice sh= ould not just be treated as an act of brinkmanship by Enron. The American p= ower utility's willingness in coming to the negotiation table will be known= tomorrow, when the Godbole Committee is expected to meet. If and when Enro= n decides to terminate the power purchase agreement, it is estimated that t= he State will require about Rs 15,000 crore to pay off the utility.=20 Maharashtra has to convince all concerned that this is the best way out, th= en auction the power plant and the gas terminal separately. In the process,= it may still end up with some loss. But that may be the better option than= being saddled with an asset with which the MSEB has no idea what to do. Th= e MSEB and the State Government should use this opportunity to convince the= international lenders and investors that their problem is only with the pr= esent owners of the power plant and that Maharashtra is as investor-friendl= y as ever. For this to happen, politicians should take the backseat and let= professionals, perhaps a reputed consultant, not former or serving bureauc= rats, do the negotiations. ---------------------------------------------------------------------------= ------------------------------------------------------------- BUSINESS STANDARD, Tuesday, May 22, 2001 Enr-off and Enr-out The Dabhol power project seems to be heading for a denouement, along two pa= rallel tracks. The company itself, there can be no doubt, is getting ready= to dump the project and pull out, just weeks before trial runs are due t= o start on the 1,444mw second phase (the first phase of 740mw has already = stopped producing power). Dabhol Power has presumably seen the obvious: tha= t there is no way in which either the Maharashtra State Electricity Board o= r the Maharashtra government will be able to meet their contractual obliga= tions and guarantees on power purchase. In its present form, therefore, the= project is as good as dead and one might as well recognise the fact.=20 Can the project be revived, and if so on what sustainable terms? A re-negot= iation committee has been put together and will meet Dabhol's representativ= es on Wednesday. But three members of the committee have already walked off= , citing one reason or other, so the re-negotiation process hasn't got off = to a propitious start. Then, given the unpromising history of earlier re-ne= gotiations and the incompetence with which MSEB has handled its original ne= gotiations, it is far from clear whether anything substantial can be extrac= ted from Dabhol - especially if Dabhol is clear about the legal ground on w= hich it stands.=20 One must presume that Dabhol's promoter, Enron, and its American lawyers ha= ve sewn up a watertight deal, without the bungling that has typified the In= dian handling of the matter. So it is likely that the cost of killing the = project will be heavy indeed, and perhaps unbearable, for both MSEB and th= e Maharashtra government. Keep in mind the cost of the project ($2.9 billio= n, or about Rs 14,000 crore) plus the present value of future profits foreg= one - and profits are said to be in the region of 30 per cent of equity, e= very year. The numbers are staggering. Is there a way to not pay such a bil= l? Yes, there are two possible options. One is for MSEB to reform its power= tariff structure (90 per cent of its customers are subsidised), cut its tr= ansmission losses (which are as high as 30 per cent), and then to persuade = the central government to allow Dabhol power to be sold to other users as = well.=20 The Godbole committee's first report, submitted some six weeks ago, suggest= s that if handled this way, Dabhol can still be made a workable proposition= - provided some re-negotiation of tariffs is done. Dabhol has said it is w= illing to re-negotiate, but with its typical in-your-face style has asked f= or the moon in return (among other things, tax breaks of all kinds). Since = agreeing to such terms will only add to the existing scandal of past mis-ne= gotiations, and since MSEB is not about to reform itself in a hurry, the p= rospects for successful re-negotiation of a reasonable and workable tariff= are slim. The second way of avoiding footing an impossible bill is to go t= he extra-commercial route, and use diplomatic pressure so as to force the c= ompany to compromise substantially. But since Enron is among the firmest su= pporters and biggest financiers of the new US president, it is difficult t= o see diplomatic pressure achieving very much, unless President Bush recogn= ises a one-sided deal when he sees one, takes into account the bad odour th= at might settle on other American companies and Indo-US relations in genera= l, and leans gently on Enron to compromise. However, these are will-o'-the-= wisp hopes and prayers, and no strategy can be predicated on their success.= What does that leave with MSEB and the Maharashtra government? The answer = is: the Godbole report. On which, read on.=20 ---------------------------------------------------------------------------= ------------------------------------------------------------- BUSINESS STANDARD, Tuesday, May 22, 2001 The Godbole findings The Godbole committee's first report, submitted on 10 April, is an eye-open= er to what can only be called a massive scandal. It leaves several players = - MSEB, successive Maharashtra governments, the Kirit Parikh re-negotiatio= n exercise, the Central Electricity Authority, and other players in New Del= hi - with no clothes on. MSEB claimed that it had negotiated a tariff that = was lower than would result from applying the central government's standard= formula. But this was patently fraudulent, because the comparison was base= d on wrong numbers, incorrect technical parameters and unequal assumptions = (one rupee-dollar rate for the Dabhol tariff, another for calculating the = government formula), all of it designed to establish what was not true.=20 Asked in court why there had been no competitive bidding, the answer (belie= ve it or not) was that MSEB was not competent to handle competitive biddin= g. But it was so wonderfully capable of handling direct tariff negotiations= that it eventually gave Dabhol a higher tariff than Enron had initially so= ught, before the negotiations began! That's only for starters. There is muc= h more in the Godbole report. On the basis of a passing comment in an FIPB = meeting, that the project's costs were broadly in line with other similar p= rojects, the power secretary in New Delhi tells the Central Electricity Aut= hority that the CEA's techno-economic clearance is not required - though th= is is statutorily mandated. The CEA agrees to this untenable proposition, b= ut later issues a vaguely worded clearance on the basis of a meeting whose = minutes were not made available to the Godbole committee.=20 The re-gasification project that was made part of the power project had a c= apacity to handle 5 million tonnes, though Dabhol itself needed only 2.1 mi= llion tonnes. A port facility had similar excess capacity. Yet the entire c= ost of these facilities was loaded on to Dabhol, along with the full cost o= f the 20-year gas supply contract. Thus, as the Godbole committee observes,= what should have been a variable cost was converted to part of the fixed c= ost, which MSEB would have to service through a capacity charge, whether an= y power or gas was bought or not. Even the power requirements of Maharashtr= a were mis-calculated in order to over-ride a warning from the World Bank t= hat the Dabhol power would not be needed. This was done by assuming that in= dustrial demand for power would grow overnight at twice the earlier rate, a= nd that MSEB itself would overnight see a dramatic worsening of its operati= ng parameters. There is still more in the report, but the point should be = obvious.=20 What the report shows is that the Dabhol contract can be subjected to legal= test (as in fact two members of the Godbole committee recommend), on the g= rounds that it was improperly handled and violative of law and common sense= If a favourable judicial decision becomes possible, that should help mitig= ate the costs of winding up a truly scandalous project. For reasons that a= re not clear, MSEB and the Maharashtra government have chosen not to go dow= n this route. Perhaps they have greater and continuing faith in the re-nego= tiation process.=20 ---------------------------------------------------------------------------= ------------------------------------------------------------- Financial Times; May 21, 2001 Enron to quit India over unpaid bills POWER PROJECT COOLING-OFF PERIOD LOOK= S UNLIKELY TO SETTLE ACRIMONIOUS DISPUTE=20 BETWEEN US COMPANY AND BOMBAY CLI: KHOZEM MERCHANT The US power company Enron is set to withdraw from India after a row over u= npaid bills that has overshadowed the country's biggest single foreign dire= ct investment. The Houston-based company has issued a "preliminary terminat= ion notice" to its Bombay client, the Maharashtra State Electricity Board (= MSEB), ending an acrimonious eight-year relationship. Enron's Dollars 2.9bn= (Pounds 2bn) power project near Bombay was a symbol of India's economic re= forms but critics, including the World Bank, said its tariffs were excessiv= e and the company was portrayed as a profiteering multinational. Enron's an= nouncement at the weekend concludes a disappointing chapter in the history = of India's power sector, which lies at the heart of attempts to improve gro= wth and ease poverty. The British company PowerGen and Cogentrix of the US = also quit recently, frustrated by red tape or because they were seeking hig= her returns elsewhere.=20 A six-month cooling-off period - as mandated in the power purchase agreemen= t - follows but is unlikely to yield progress. Enron will then issue a fina= l termination notice and present a claim for compensation. "This is the end= -game for Enron. It is a great day for us," said Pradyumna Kaul, a manageme= nt consultant and leader of Enron Virodhi Andol (Anti-Enron Movement). "Ind= ia produces electricity from coal at a unit cost of about Rs1 (about 1.5p).= Enron is using liquefied natural gas as a fuel and charging a unit cost of= Rs5. Neither Indians nor Indian manufacturers can afford Enron's expensive= energy," he said.=20 Dabhol Power Company (DPC), which operates the Bombay plant and in which En= ron has a 65 per cent share, said that "after months of working to find a s= olution, it is apparent that MSEB and the government of Maharashtra are unw= illing to honour their commitments". DPC criticised the Indian government f= or its "unwillingness to assist MSEB and the Maharashtra government in eith= er buying power, or providing credit support behind other buyers". MSEB owe= s the US company Dollars 45m for power consumed in December and January. Bu= t the utility is refusing to pay until its claim for Rs4.2bn (Pounds 63m) f= or "Enron's technical failures" is settled.=20 Enron, which has come under increasing pressure from its international lend= ers to get tough with MSEB, has twice invoked the Indian government's guara= ntee on unpaid bills. But in the most recent instance, New Delhi refused to= pay until MSEB's own claims were settled. Enron's tariff is typically thre= e times higher than that of other independent power producers because of th= e high cost of naphtha and a depreciation of the rupee against the dollar. = Phase one of Enron's project, a 740MW plant fuelled by naphtha, came on str= eam in May 1999, and phase two, a Dollars 1.87bn site of 1,624MW capacity d= esigned to run on cheaper liquefied natural gas, will be completed in the n= ext few months. Enron employs 11,000 people in India. www.ft.com/energy=20 ---------------------------------------------------------------------------= ------------------------------------------------------------- Financial Times, May 21, 2001 India's power struggles: Enron's plight could mark a turning point in Indi= a's attempts to attract foreign investment, David Gardner: The soap opera of Enron in India has reached a critical moment. Once again,= the US energy company is pitted against the state of Maharashtra, in weste= rn India. But the twist this time is that Enron is threatening to pull the = plug on the Dabhol Power Company, the single largest foreign investment in = India. It is, at first sight, a wearisome repetition of earlier episodes. T= he Dollars 2.9bn Dabhol deal has been in trouble before. In 1995, a rightwi= ng Hindu nationalist coalition of the Shiv Sena and Bharatiya Janata party = - now the majority of the ruling coalition in New Delhi - ousted the Congre= ss party government in Maharashtra and tore up the contract its predecessor= s had signed. The project went ahead after Enron secured a sovereign guaran= tee from the government of India to cover any failure to pay by the Maharas= htra State Electricity Board, Dabhol's sole customer.=20 The first 740MW Dabhol plant is now functioning and a second 1,444MW phase = is close to completion. But MSEB has been defaulting on payments since last= December and wishes to renegotiate the contract with Enron, claiming the e= lectricity tariffs are unjustifiably high. This weekend Enron began proceed= ings to terminate the agreement. The move triggers an arbitration process t= hat could begin as soon as Wednesday between Dabhol and the MSEB. But Enron= 's actions are beginning to look like the first step towards withdrawal fro= m the project, in which it has a 65 per cent stake. In the past 18 months, = Cogentrix of the US, National Power of the UK, Daewoo of South Korea and El= ectricite de France have all withdrawn from the Indian power sector. Of eig= ht so-called "fast track" power projects authorised by New Delhi in the pas= t decade, Enron's is the only one to have been commissioned.=20 Whatever the outcome, a great deal is at stake. The imbroglio could further= deter a barely detectable trickle of foreign direct investment into India.= It could blight India's urgent need to double its electricity generation. = And it raises the question of the extent to which contracts are enforceable= in India - which alone could raise the risk premium future investors may s= eek. Unless carefully handled, the controversy could damage India's ambitio= n to raise growth by creating an investment-friendly environment, in spite = of the success of industries such as software and pharmaceuticals. Kenneth = Lay, Enron's chairman, said earlier this month that while his company had n= o immediate plans to sell its Dabhol stake, the dispute "sends a very bad s= ignal to the rest of the world as to the difficulties of investing in India= , which is not what India needs right now". Several ministers, including Ya= shwant Sinha, finance minister, have said they see no reason why Enron's ex= perience should deter foreign investors. That is true only in the sense tha= t there is very little foreign investment anyway. "The government is in den= ial," one minister admits. Publishing foreign direct investment figures has= become "an annual embarrassment", he adds. India received an estimated Dol= lars 2.6bn in inward investment last year, or 0.24 per cent of worldwide fo= reign direct investment flows. Complete figures for 1999 show it received D= ollars 2.2bn. China, its regional rival, received Dollars 63.4bn - includin= g Hong Kong - according to the United Nations. In just as telling a contras= t, Electricite de France, which pulled out of India after battling for seve= n years to advance its 1,000MW Bhadravati project, is proceeding with a ser= ies of power plants in China, Egypt and Mexico.=20 "We say we want foreign investment in the power industry and the policy say= s 'yes, yes, yes'," says one civil servant who has soldiered long and hard = to introduce reform. "But the practice, I'm afraid, is 'no, no, no'." The E= nron project, its critics say, is particular. Although Dabhol's power purch= asing agreement with the MSEB is confidential, it is widely believed to emb= ody a "hurdle rate of return" - the after-tax, internal rate of return on e= quity in dollars - in excess of 20 per cent. The normal rate sought by the = dwindling investors in India's power industry is 16-18 per cent. In additio= n, Dabhol's charges per kilowatt hour are higher than anticipated because i= ts "load factor", or capacity usage, is much lower. The financially strappe= d MSEB is buying less and Enron's contract allows it to apply variable char= ges over the fewer units of output, raising the cost. There is an important= sense, however, in which all this is academic. India's state electricity b= oards are de facto bankrupt. Whether the cost per unit is one rupee or 10, = they cannot pay.=20 The problem is user charges. Most Indian farmers get free power, much of In= dia's urban middle class steals power and too many of India's populist poli= ticians are frightened of agreeing on a minimum common tariff that might be= gin restoring the solvency of the state electricity boards and thus facilit= ate investment. Many industrial users that could pay, angered by cross-subs= idies they are charged for the inefficient system, have switched to secure = "captive" capacity of their own, an estimated 10,000MW of which is now in p= lace. While India needs to boost installed capacity by about 100,000MW by 2= 010, with no one to pay for electricity a mere 464MW was commissioned last = year, according to Power Line, an industry newsletter. "It is self-defeatin= g to try to attract an Enron without first putting your house in order," on= e minister says. "It was always obvious that within the present set-up Maha= rashtra would never be able to pay." Hari Dhaul, head of the Independent Po= wer Producers of India, says restoring the solvency of "the (state electric= ity boards) is priority number one; unless we do that, all talk of power an= d infrastructure is academic." The government made a start when Mr Sinha, i= n the February budget, announced a still-to-be-determined package of soft l= oans for states that reform their electricity boards and begin introducing= more realistic tariffs. But since then the government has floundered over = a series of scandals - not a propitious climate for reform. The Enron case = has the potential to become, if not another scandal, at least a blight. As = a senior executive at a foreign power company puts it: "India needs modern = infrastructure if it is ever to become a modern country. It needs foreign i= nvestment to do part of it but that will only come if the perception become= s that it is easy to invest in India." Copyright: The Financial Times Limit= ed=20 ---------------------------------------------------------------------------= ------------------------------------------------------------- Financial Times; May 22, 2001 India unplugged=20 The latest threat from Enron, the US energy group, to pull out of its Dabho= l power plant venture near Bombay illustrates both the shambolic nature of = India's electricity system and the wider risks of investing in the country.= The project had serious drawbacks. But unless energy companies can expect = a commercial return, they will not invest in badly needed new infrastructur= e. Unless contracts are honoured, few foreign companies will consider India= as a place to do business. The Maharashtra state electricity board, the Da= bhol plant's only customer, is refusing to pay its bills, arguing that the = tariffs are unjustifiably inflated. Prices are certainly high. The plant, f= uelled by expensive naphtha, is running way below capacity due to unexpecte= dly low demand, further increasing unit costs. More difficult to judge is w= hether this is within the terms of the contract, since Enron is keeping the= details confidential.=20 The argument over unit costs, though, is in any case less relevant than it = might seem as most of India's state electricity boards, including Maharasht= ra's, operate at a large loss. Many consumers pay highly subsidised rates. = Many pay nothing. Bills go uncollected. Half of Delhi's electricity output = is stolen, mostly to power middle-class air conditioners rather than light = bulbs for the poor. Bankrupt state utilities are then periodically bailed o= ut to the detriment of spending on health and education. India's state auth= orities urgently need to introduce a common minimum tariff and a more targe= ted form of subsidy. This may be unpopular, but the central government's of= fer of Dollars 5.6bn, raised via a bond issue, to pay off the electricity b= oards' debts should sweeten the pill. A new pricing regime is only the firs= t step. Electricity generation, transmission and distribution should be unb= undled and privatised. Contracts should be awarded through competition, not= by arrangement with the relevant political party. This would require much = more transparency than many of India's politicians have been ready to conce= de.=20 Enron's difficulties over the Dabhol plant, the largest foreign investment = in India, have persuaded other western companies to withdraw from similar p= rojects. This will hardly help the country to overcome the power shortages = that hinder economic development. But the effect will reverberate well beyo= nd the energy sector. India receives a pitifully small slice of the world's= foreign direct investment. Infrastructure weaknesses are certainly one fac= tor. But as important is the readiness of Indian politicians to manipulate = foreign business for their own ends.=20 ---------------------------------------------------------------------------= ------------------------------------------------------------- Financial Times; May 22, 2001 Maharashtra pays the price for bad governance: Dispute with Enron has calle= d into question its status as India's preferred home for investment, KHOZEM MERCHANT Bal Thackeray's legacy as the power behind the throne of Maharashtra, India= 's richest state, included an informal "flyover index". As leader of the Sh= iv Sena party that ruled Maharashtra in a coalition for four years from 1995, he sanctio= ned 55 new road bridge flyovers at a cost of Rs180bn (Pounds 2.6bn) in Bomb= ay, the financial capital. The flyover index, it was said, reflected the in= ept government and fiscal profligacy with which his party's ruled ended in = 1999. "I don't much care for finance and foreign investment, I don't understand these things," Mr Thack= eray told the Financial Times last year. The Hindu militant's comments dama= ged investor sentiment already reeling from his warning of "blood on the st= reets" if he was arrested for his role in communal riots a decade earlier. = Shiv Sena is a regional party named after the Hindu warrior god, Shiva.=20 Debt and demagogy were the hallmarks of a man who embodied a regional asser= tiveness that was at odds with an emerging reformist economics. It was in t= his environment that the US power company, Enron, entered India with the co= untry's largest ever direct investment and set the scene for a test of gove= rnance. As afrustrated Enron inches closer to quitting India after a protra= cted legal battle over contracts and payments, some are saying that here is= an outstanding example of how there is an economic price to be paid for be= ing badly governed. Maharashtra has also lost a car factory investment to T= amil Nadu and a business school to Hyderabad, both globally prestigious pro= jects squandered amid charges of corruption. Now Maharashtra's status as th= e preferred home for inward investment - helped by Bombay's status as the l= eading business city in the country - is under pressure. Its volatile polit= ics have undermined the rule of law and foreign investors are alarmed by official abuse of the sanctity of contract. "Good governanc= e will bring in good investment; bad governance will attract bad investment= ," says Mahesh Vyas, executive director of the Centre for Monitoring Indian= Economy, a think-tank in Bombay.=20 Both Enron and the state were condemned for the way they put in place the D= ollars 2.9bn investment. Maharashtra "got expensive power generation before= solving the bigger problem of power distribution. This is bad governance a= nd it led to bad administration," said Mr Vyas. The news has not all been b= ad. For instance, from a standing start Maharashtra is now second only to B= angalore as a centre for software services, in spite of the fact that it of= fers no obvious comparative advantage, such as Bangalore's excellence in en= gineering and sciences. This is partly explained by Maharashtra's historica= lly sound civil administration, which despite the surrounding political vol= atility, continues to work for, rather than against, business. A reformist = and inclusive tradition befitting a port city attracted social campaigners = as well as businesses fleeing the declining colonial capital of Calcutta.= =20 Bombay's financial status, too, blossomed from its link with the Gujarati b= rokering class, whose influence has only now been tamed after yet another s= hare-price rigging scandal. "With these advantages, complacency set in," sa= ys Professor Mangesh Korgaonker, who heads the management school at Bombay'= s acclaimed Indian Institute of Technology. The state's growth rate of betw= een 6-8 per cent over the past decade outstripped national performance. "Ma= harashtra did not need to shout to gain investment, unlike its upstart riva= ls. But the historic advantage has been shaken," says Prof Korgaonker. This= means that for the first time since the state emerged along with neighbour= ing Gujarat from the larger territory of Bombay in the 1960s, Maharashtra i= s losing out to rival states, where the rule of law and political stability= are strong attractions. The upshot is a renewed urgency to shift the state= 's axis from low-value manufacturing to IT, media and entertainment, such as "Bollywood", as well as financial services= .=20 The state is promoting these alternatives not only because of the potential= ly damaging consequences of the Enron dispute on foreign direct investment = or because a flawed financial system may deter investors. It is doing so be= cause of property prices that are among the steepest in the world and an ov= erburdened transport network, which together raise the costs of doing busin= ess in Maharashtra. Implicit in this process is an attempt to secure best p= ractices, via regulatory changes, in areas such as public accountability, i= nvestor protection and corporate ethics. "The quality of governance now has= a market valuation," says Dr R Patil, the former managing director of the = National Stock Exchange, a rare technology driven-bourse where Bombay's cor= rupt broker oligarchy holds no sway. "Bombay First" embodies these sentimen= ts. Modelled on asimilar initiative in London, "Bombay First" is an attempt= by the city's chamber of commerce and business to project the city as a re= gional financial centre. The aim is to compete with Singapore and Hong Kong= . That implies legislative changes to gain an offshore status. It also mean= s easing pressure on property prices by releasing land for development nort= h of costly central Bombay. Some of the city's biggest financial names have= already shifted operations north of Bombay, to a cluster known ambitiously= as the new financial district. But as Prof Korgaonker says, where business= is conducted may count for nothing without a change in how business is con= ducted in the new Maharashtra.=20 ---------------------------------------------------------------------------= ------------------------------------------------------------- Financial Times; May 22, 2001 Ally threatens to desert BJP coalition, DAVID GARDNER The government of Atal Behari Vajpayee, reeling from a series of scandals a= nd regional election setbacks, faced a new crisis last night as a key ally = threatened to desert it. The crisis, the result of regional squabbling in t= he tiny, north-eastern state of Manipur bordering Burma, shows how vulnerab= le Mr Vajpayee's Bharatiya=20 Janata party (BJP) has become to blackmail by its junior coalition partners= . The Samata party said it would pull out of the New Delhi government after= the BJP abandoned the Manipur chief minister in a vote of confidence yeste= rday in the regional assembly. The fall of the regional government also dra= matised the loss of national authority of the BJP leadership, which had ins= tructed its local members of parliament to support the Samata administratio= n. Samata leaders in Delhi, however, chose to view the events as a "back-st= abbing" by the BJP. Samata is still smarting from the resignation of its le= ader, George Fernandes, as defence minister, and Jaya Jaitley, its party pr= esident, caught up in a cash-for-arms scandal in March. The defection of 12= Samata MPs would further weaken Mr Vajpayee's coalition, at a time when se= veral allies of the BJP are wondering whether they are being politically da= maged by association with the Hindu revivalist party.=20 Needing 272 MPs to command a majority in parliament, Mr Vajpayee would be d= own to 279 if Samata left. But that thin majority includes the 29 MPs of th= e secularTelugu Desam party of Chandrababu Naidu, the reformist leader of A= ndhra Pradesh. Even before the BJP's current troubles, Mr Naidu maintained = a careful distance from the government while voting with the coalition. Tha= t distance appears to be increasing. One reason is that the BJP is increasi= ngly turning for help to itsshadowy parent organisation, the Rashtriya Sway= amsevak Sangh (RSS), even though other RSS front organisations in the trade= unions and among farmers are leading a campaign to eviscerate the coalitio= n's economic reform programme. The dismal outlook for reform, fears for the= government's stability and the weekend threat by Enron, the US power compa= ny, to pull the plug on the biggest single foreign investment in India, com= bined to unsettle markets yesterday. The rupee slid by 4 paise to Rs46.98 a= gainst the dollar, close to the psychological barrier of Rs47. Concern abou= t the Enron dispute, meanwhile, sharply depressed the share prices of leadi= ng banks with exposure to the Dollars 2.9bn Dabhol power project near Bomba= y, in which Enron has a 65 per cent stake. Enron announced on Saturday that= it had begun the legal process of withdrawing from its contract with the M= aharashtra State Electricity Board, frustrated at its failure to pay for Da= bhol's power. The state authorities raised the stakes yesterday - slapping = a second Rs4bn (Pounds 59m) penalty on Enron for breaks in supply - ahead o= f an arbitration meeting tomorrow.=20 ---------------------------------------------------------------------------= ------------------------------------------------------------- THE ECONOMIC TIMES, Tuesday, May 22, 2001 LETTERS TO THE EDITOR Power corrupts... APROPOS of Enron's notice to the government of Maharashtra, Mumbai should a= ct pragmatically instead of indulging in heroics and rhetoric. It should se= t its own house in order, improve MSEB's functioning and quickly privatise.= If it fails to do these its threat to Enron will also be taken as just ano= ther case of demanding kickbacks.=20 Mulo Gandhi, Pune=20 The record till date IT is sad really that Enron had to issue its pre-termi= nation notice. We should now ask whether MSEB would be able to construct s= uch a project in record time. Corruption is rampant in MSEB. They may say E= nron power is not needed, but you cannot even get a new connection easily. = Interruptions are commonplace in rural areas (sometimes up to four times a = week). Power thefts are commonplace too. Each day, on average, we pay MSEB = about Rs 6 per unit for commercial connections. But most people would be wi= lling to pay Rs 7 or so if they got clean, uninterrupted power. We have see= n, for example, the vast cost overruns of many of the official water manag= ement projects. These overruns go up to 20 times, with delays stretching up= to 10 years -with no guarantee no results even then. All told, the governm= ent is sending very wrong signals to the international community by raking = up the Enron controversy. It should set its own house in order.=20 Ram Kapse, By e-mail